Texas Capital Bancshares: Non-Interest-Bearing Deposits Plummet (NASDAQ:TCBI)

It was not one of the best quarters for Texas Capital Bancshares (NASDAQ:TCBI) and it is showing signs of weakness once again.

• Q4 Non-GAAP EPS of $0.65 misses by $0.07.
• Revenue of $245.85M misses by $5.34M.

Although the price per share recovered the ground lost in the wake of the banking crisis in early 2023, the all-time high is still about 40% distant, so there is much to improve. In my previous article, I highlighted the issue of AOCI due to rising Treasury yields. As of today this problem is receding but there are other issues to be evaluated.

Loan portfolio and non-interest income

As we all know, the Fed’s tight monetary policy is dampening demand for credit. With a Fed Funds Rate of 5.25% – 5.50% obviously both businesses and households are trying to do without debt whenever possible, so this affects the growth of the loan portfolio of all banks; TCBI included.

• Commercial loans reached $10.40 billion; up 6% year-on-year but 0% from the previous quarter.
• Mortgage finance loans reached $4 billion, down 3% year-on-year and -10% from the previous quarter.
• CRE loans were the best performing: up 13% year-on-year and 3% from the previous quarter.

As can be seen from this data, the decline is evident especially in recent months rather than YoY. Presumably, the higher the rates are, the more TCBI’s loan portfolio will tend toward a stall. The effects of monetary policy often have a lag of 12–18 months, implying that the real economy is only now beginning to feel the effects.

Finally, TCBI’s asset quality remains stable, with an NPAs/Total Asset of only 0.29%.

As for non-interest income, the sensational growth from last year remains.

The Investment Banking segment showed the best performance, +146% YoY. Thanks to it, income from Areas of Focus reached $130.40 million in FY2023, +64% over last year. Management cares a lot about this business area, in fact, they are trying to make it more and more important in terms of revenue generated.

Investment banking is on track to reach the target of 10% of total revenues, Treasury Product Fees are slightly further behind the target. Overall, the goal is to bring noninterest income to 15-20% of total revenues: for now, the lower threshold has been reached.

Deposits and net interest income

We come to the sore point of this quarterly report, deposits. In general, in recent quarters TCBI has shown quite a few difficulties due to the rising cost of interest-bearing deposits, yet it has always managed to cope with this issue thanks to a high amount of non-interest-bearing deposits.

Well, compared to the previous quarter, non-interest-bearing deposits plummeted by 22% and reached $7.32 billion. In just three months, from being 39.16% of total deposits, today they are only 32.75%. All this has had repercussions on the NIM and the NII.

For the third quarter in a row, the slump in NIM continues, now at 2.93%. After a slight improvement in Q3 2023, NII is back down again, driven mainly by the lower yield on MF Loans ($17.9 million) and the rising cost of deposits as well as a deterioration in volumes ($10.10 million).

Various equity considerations

Regarding regulatory capital levels, TCBI presents an optimal situation. The target for 2024 is a CET1 greater than 11%, definitely feasible given that today it is on 12.65%.

These capital levels have been achieved due to a conservative policy of management, tending to have a huge amount of cash on hand. Currently, Average Cash & Total Securities amount to 30% of total assets, but according to the guidance they could drop to 20% by the end of 2024.

Probably, TCBI is far too well capitalized, which is why management would like to use a good portion of the cash on hand. Originating new loans will not be easy given current market conditions, but TCBI will continue to remunerate its shareholders through both dividends and buybacks. In particular, the latter seems to be management’s focus:

• During Q4 2023, the Company repurchased 809,623 shares of its common stock for an aggregate purchase price, including excise tax expense, of $44.8 million, at a weighted average price of $54.90 per share.
• On January 17, 2024, the Company’s board of directors authorized a new share repurchase program under which the Company may repurchase up to $150.0 million in shares of its outstanding common stock through January 31, 2025.

This is a rather strong signal to the market, as it means that management strongly believes that the company is undervalued. Unlike non-financial companies, for a bank to carry out a buyback plan involves more complexity since the move would lead to a reduction in equity, a key component for financial companies. In TCBI’s case, I think there should be no problem since it is well capitalized.

Conclusion

In terms of earnings, it was not one of the best quarters for TCBI: the loan portfolio is struggling to grow and non-interest-bearing deposits plummeted by $2.02 billion in a single quarter. All this has affected NIM and NII and could make the start of this 2024 complicated.

In any case, despite these difficulties, management believes in TCBI’s potential and is buying a considerable amount of its own shares. If we looked solely at multiples, indeed compared to historical values, TCBI seems undervalued:

• LTM Price / Tangible Book Value per Share: 1.07x vs. 10-year average :1.49x.
• LTM Price / Diluted EPS (P/E): 8.22x, vs. 10-year average: 18.04x.